Publication 17
taxmap/pub17/p17-120.htm#en_us_publink1000173217taxmap/pub17/p17-120.htm#en_us_publink1000173219Limit on itemized deductions expired.(p150)
For 2010, your itemized deductions are no longer limited because
of your adjusted gross income.
taxmap/pub17/p17-120.htm#TXMP340e2b77This chapter discusses what interest expenses you can deduct.
Interest is the amount you pay for the use of borrowed money.
The following are types of interest you can deduct as itemized
deductions on Schedule A (Form 1040).
- Home mortgage interest, including certain points and mortgage
insurance premiums.
- Investment interest.
This chapter explains these deductions. It also explains where
to deduct other types of interest and lists some types of interest you cannot
deduct.
Use
Table 23-1
to find out where to get more information on various types of interest,
including investment interest.
Useful items
You may want to see:
Publication 936
Home Mortgage Interest Deduction 550
Investment Income and Expenses taxmap/pub17/p17-120.htm#en_us_publink1000173221
Generally, home mortgage interest is any interest you pay on a loan secured by
your home (main home or a second home). The loan may be a mortgage to buy your
home, a second mortgage, a line of credit, or a home equity loan.
You can deduct home mortgage interest if all the following conditions are met.
- You file Form 1040 and itemize deductions on Schedule A (Form
1040).
- The mortgage is a secured debt on a qualified home in which
you have an ownership interest. (Generally, your mortgage is a secured debt if
you put your home up as collateral to protect the interest of the lender. The
term "qualified home" means your main home or second home. For details, see
Publication 936.)
Both you and the lender must intend that the loan be repaid.
In most cases, you can deduct all of your home mortgage interest.
How much you can deduct depends on the date of the mortgage, the amount of the
mortgage, and how you use the mortgage proceeds.
taxmap/pub17/p17-120.htm#en_us_publink1000173223If all of your mortgages fit into one or more of the following
three categories at all times during the year, you can deduct all of the
interest on those mortgages. (If any one mortgage fits into more than one
category, add the debt that fits in each category to your other debt in the same
category.)
The three categories are as follows:
- Mortgages you took out on or before October 13, 1987 (called
grandfathered debt).
- Mortgages you took out after October 13, 1987, to buy, build,
or improve your home (called home acquisition debt), but only if throughout 2010
these mortgages plus any grandfathered debt totaled $1 million or less ($500,000
or less if married filing separately).
- Mortgages you took out after October 13, 1987, other than
to buy, build, or improve your home (called home equity debt), but only if
throughout 2010 these mortgages totaled $100,000 or less ($50,000 or less if
married filing separately) and totaled no more than the fair market value of
your home reduced by (1) and (2).
The dollar limits for the second and third categories apply
to the combined mortgages on your main home and second home.
See
Part II
of Publication 936 for more detailed definitions of grandfathered,
home acquisition, and home equity debt.
taxmap/pub17/p17-120.htm#en_us_publink1000173225You cannot fully deduct interest on a mortgage that does not
fit into any of the three categories listed above. If this applies to you, see
Part II
of Publication 936 to figure the amount of interest you can
deduct.
taxmap/pub17/p17-120.htm#en_us_publink1000173226This section describes certain items that can be included as
home mortgage interest and others that cannot. It also describes certain special
situations that may affect your deduction.
taxmap/pub17/p17-120.htm#en_us_publink1000173227You can deduct as home mortgage interest a late payment charge
if it was not for a specific service performed in connection with your mortgage
loan.
taxmap/pub17/p17-120.htm#en_us_publink1000173228If you pay off your home mortgage early, you may have to pay
a penalty. You can deduct that penalty as home mortgage interest provided the
penalty is not for a specific service performed or cost incurred in connection
with your mortgage loan.
taxmap/pub17/p17-120.htm#en_us_publink1000173229If you sell your home, you can deduct your home mortgage interest
(subject to any limits that apply) paid up to, but not including, the date of
sale.
taxmap/pub17/p17-120.htm#en_us_publink1000173230John and Peggy Harris sold their home on May 7. Through April
30, they made home mortgage interest payments of $1,220. The settlement sheet
for the sale of the home showed $50 interest for the 6-day period in May up to,
but not including, the date of sale. Their mortgage interest deduction is $1,270
($1,220 + $50).
taxmap/pub17/p17-120.htm#en_us_publink1000173231If you pay interest in advance for a period that goes beyond
the end of the tax year, you must spread this interest over the tax years to
which it applies. You can deduct in each year only the interest that qualifies
as home mortgage interest for that year. However, there is an exception that
applies to points, discussed later.
taxmap/pub17/p17-120.htm#en_us_publink1000173232You may be able to claim a mortgage interest credit if you were
issued a mortgage credit certificate (MCC) by a state or local government.
Figure the credit on Form 8396, Mortgage Interest Credit. If you take this
credit, you must reduce your mortgage interest deduction by the amount of the
credit.
For more information on the credit, see
chapter 37.
If you are a minister or a member of the uniformed services and
receive a housing allowance that is not taxable, you can still deduct your home
mortgage interest.
taxmap/pub17/p17-120.htm#en_us_publink1000173235If you qualify for mortgage assistance payments for lower-income
families under section 235 of the National Housing Act, part or all of the
interest on your mortgage may be paid for you. You cannot deduct the interest
that is paid for you.
taxmap/pub17/p17-120.htm#en_us_publink1000173236Do not include these mortgage assistance payments in your income.
Also, do not use these payments to reduce other deductions, such as real estate
taxes.
taxmap/pub17/p17-120.htm#en_us_publink1000173237If a divorce or separation agreement requires you or your spouse
or former spouse to pay home mortgage interest on a home owned by both of you,
the payment of interest may be alimony. See the discussion of
Payments for jointly-owned home in chapter 18.
If you make annual or periodic rental payments on a redeemable
ground rent, you can deduct them as mortgage interest.
Payments made to end the lease and to buy the lessor's entire
interest in the land are not deductible as mortgage interest. For more
information, see Publication 936.
taxmap/pub17/p17-120.htm#en_us_publink1000173240Payments on a nonredeemable ground rent are not mortgage interest.
You can deduct them as rent if they are a business expense or if they are for
rental property.
taxmap/pub17/p17-120.htm#en_us_publink1000173241A reverse mortgage is a loan where the lender pays you (in a
lump sum, a monthly advance, a line of credit, or a combination of all three)
while you continue to live in your home. With a reverse mortgage, you retain
title to your home. Depending on the plan, your reverse mortgage becomes due
with interest when you move, sell your home, reach the end of a pre-selected
loan period, or die. Because reverse mortgages are considered loan advances and
not income, the amount you receive is not taxable. Any interest (including
original issue discount) accrued on a reverse mortgage is not deductible until
the loan is paid in full. Your deduction may be limited because a reverse
mortgage loan generally is subject to the limit on
Home Equity Debt discussed in Publication 936.
taxmap/pub17/p17-120.htm#en_us_publink1000173242If you live in a house before final settlement on the purchase,
any payments you make for that period are rent and not interest. This is true
even if the settlement papers call them interest. You cannot deduct these
payments as home mortgage interest.
taxmap/pub17/p17-120.htm#en_us_publink1000173243You cannot deduct the home mortgage interest on grandfathered
debt or home equity debt if you used the proceeds of the mortgage to buy
securities or certificates that produce tax-free income. "Grandfathered debt"
and "home equity debt" are defined earlier under
Amount Deductible.
taxmap/pub17/p17-120.htm#en_us_publink1000173244If you receive a refund of interest in the same tax year you
paid it, you must reduce your interest expense by the amount refunded to you. If
you receive a refund of interest you deducted in an earlier year, you generally
must include the refund in income in the year you receive it. However, you need
to include it only up to the amount of the deduction that reduced your tax in
the earlier year. This is true whether the interest overcharge was refunded to
you or was used to reduce the outstanding principal on your mortgage.
If you received a refund of interest you overpaid in an earlier year, you
generally will receive a Form 1098, Mortgage Interest Statement, showing the
refund in box 3. For information about Form 1098, see
Form 1098, Mortgage Interest Statement, later.
For more information on how to treat refunds of interest deducted
in earlier years, see
Recoveries in chapter 12.
The term "points" is used to describe certain charges paid, or treated as paid,
by a borrower to obtain a home mortgage. Points may also be called loan
origination fees, maximum loan charges, loan discount, or discount points.
A borrower is treated as paying any points that a home seller
pays for the borrower's mortgage. See
Points paid by the seller, later.
You generally cannot deduct the full amount of points in the
year paid. Because they are prepaid interest, you generally deduct them ratably
over the life (term) of the mortgage. See
Deduction Allowed Ratably, next.
If you do not meet the tests listed under
Deduction Allowed in Year Paid, later, the loan is not a home improvement loan, or you choose
not to deduct your points in full in the year paid, you can deduct the points
ratably (equally) over the life of the loan if you meet all the following tests.
- You use the cash method of accounting. This means you report
income in the year you receive it and deduct expenses in the year you pay them.
Most individuals use this method.
- Your loan is secured by a home. (The home does not need to
be your main home.)
- Your loan period is not more than 30 years.
- If your loan period is more than 10 years, the terms of your
loan are the same as other loans offered in your area for the same or longer
period.
- Either your loan amount is $250,000 or less, or the number
of points is not more than:
- 4, if your loan period is 15 years or less, or
- 6, if your loan period is more than 15 years.
You can fully deduct points in the year paid if you meet all
the following tests. (You can use
Figure 23-B
as a quick guide to see whether your points are fully deductible in the year
paid.)
- Your loan is secured by your main home. (Your main home is
the one you ordinarily live in most of the time.)
- Paying points is an established business practice in the area
where the loan was made.
- The points paid were not more than the points generally charged
in that area.
- You use the cash method of accounting. This means you report
income in the year you receive it and deduct expenses in the year you pay them.
(If you want more information about this method, see
Accounting Methods in chapter 1.)
- The points were not paid in place of amounts that ordinarily
are stated separately on the settlement statement, such as appraisal fees,
inspection fees, title fees, attorney fees, and property taxes.
- The funds you provided at or before closing, plus any points
the seller paid, were at least as much as the points charged. The funds you
provided do not have to have been applied to the points. They can include a down
payment, an escrow deposit, earnest money, and other funds you paid at or before
closing for any purpose. You cannot have borrowed these funds from your lender
or mortgage broker.
- You use your loan to buy or build your main home.
- The points were computed as a percentage of the principal
amount of the mortgage.
- The amount is clearly shown on the settlement statement (such
as the Settlement Statement, Form HUD-1) as points charged for the mortgage. The
points may be shown as paid from either your funds or the seller's.
taxmap/pub17/p17-120.htm#en_us_publink1000173256Note.If you meet all of these tests, you can choose to either fully
deduct the points in the year paid, or deduct them over the life of the loan.
taxmap/pub17/p17-120.htm#en_us_publink1000173258You can also fully deduct in the year paid points paid on a loan
to improve your main home, if tests (1) through (6) are met.
 |
Second home.
You cannot fully deduct in the year paid points you pay on loans secured by your
second home. You can deduct these points only over the life of the loan.
|
taxmap/pub17/p17-120.htm#en_us_publink1000173260Generally, points you pay to refinance a mortgage are not deductible
in full in the year you pay them. This is true even if the new mortgage is
secured by your main home.
However, if you use part of the refinanced mortgage proceeds
to improve your main home and you meet the first 6 tests listed under
Deduction Allowed in Year Paid, earlier, you can fully deduct the part of the points related
to the improvement in the year you paid them with your own funds. You can deduct
the rest of the points over the life of the loan.
In 1996, Bill Fields got a mortgage to buy a home. In 2010, Bill
refinanced that mortgage with a 15-year $100,000 mortgage loan. The mortgage is
secured by his home. To get the new loan, he had to pay three points ($3,000).
Two points ($2,000) were for prepaid interest, and one point ($1,000) was
charged for services, in place of amounts that ordinarily are stated separately
on the settlement statement. Bill paid the points out of his private funds,
rather than out of the proceeds of the new loan. The payment of points is an
established practice in the area, and the points charged are not more than the
amount generally charged there. Bill's first payment on the new loan was due
July 1. He made six payments on the loan in 2010 and is a cash basis taxpayer.
Bill used the funds from the new mortgage to repay his existing
mortgage. Although the new mortgage loan was for Bill's continued ownership of
his main home, it was not for the purchase or improvement of that home. He
cannot deduct all of the points in 2010. He can deduct two points ($2,000)
ratably over the life of the loan. He deducts $67 [($2,000 ÷ 180 months)
× 6 payments] of the points in 2010. The other point ($1,000) was a fee for
services and is not deductible.
taxmap/pub17/p17-120.htm#en_us_publink1000173263The facts are the same as in
Example 1,
except that Bill used $25,000 of the loan proceeds to improve
his home and $75,000 to repay his existing mortgage. Bill deducts 25% ($25,000
÷ $100,000) of the points ($2,000) in 2010. His deduction is $500 ($2,000
× 25%).
Bill also deducts the ratable part of the remaining $1,500 ($2,000
− $500) that must be spread over the life of the loan. This is $50
[($1,500 ÷ 180 months) × 6 payments] in 2010. The total amount Bill
deducts in 2010 is $550 ($500 + $50).
taxmap/pub17/p17-120.htm#en_us_publink1000173264This section describes certain special situations that may affect
your deduction of points.
taxmap/pub17/p17-120.htm#en_us_publink1000173265If you do not qualify to either deduct the points in the year
paid or deduct them ratably over the life of the loan, or if you choose not to
use either of these methods, the points reduce the issue price of the loan. This
reduction results in original issue discount, which is discussed in chapter 4 of
Publication 535.
taxmap/pub17/p17-120.htm#en_us_publink1000173266Amounts charged by the lender for specific services connected
to the loan are not interest. Examples of these charges are:
- Appraisal fees,
- Notary fees, and
- Preparation costs for the mortgage note or deed of trust.
You cannot deduct these amounts as points either in the year
paid or over the life of the mortgage.
The term "points" includes loan placement fees that the seller
pays to the lender to arrange financing for the buyer.
taxmap/pub17/p17-120.htm#en_us_publink1000173268The seller cannot deduct these fees as interest. But they are
a selling expense that reduces the amount realized by the seller. See
chapter 15 for information on selling your home.
The buyer reduces the basis of the home by the amount of the seller-paid points
and treats the points as if he or she had paid them. If all the tests under
Deduction Allowed in Year Paid, earlier, are met, the buyer can deduct the points in the year
paid. If any of those tests are not met, the buyer deducts the points over the
life of the loan.
If you meet all the tests in
Deduction Allowed in Year Paid, earlier, except that the funds you provided were less than
the points charged to you (test (6)), you can deduct the points in the year
paid, up to the amount of funds you provided. In addition, you can deduct any
points paid by the seller.
When you took out a $100,000 mortgage loan to buy your home in
December, you were charged one point ($1,000). You meet all the tests for
deducting points in the year paid, except the only funds you provided were a
$750 down payment. Of the $1,000 charged for points, you can deduct $750 in the
year paid. You spread the remaining $250 over the life of the mortgage.
taxmap/pub17/p17-120.htm#en_us_publink1000173276The facts are the same as in
Example 1,
except that the person who sold you your home also paid one
point ($1,000) to help you get your mortgage. In the year paid, you can deduct
$1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller).
You spread the remaining $250 over the life of the mortgage. You must reduce the
basis of your home by the $1,000 paid by the seller.
taxmap/pub17/p17-120.htm#en_us_publink1000173277If you meet all the tests in
Deduction Allowed in Year Paid, earlier, except that the points paid were more than generally
paid in your area (test (3)), you deduct in the year paid only the points that
are generally charged. You must spread any additional points over the life of
the mortgage.
If you spread your deduction for points over the life of the
mortgage, you can deduct any remaining balance in the year the mortgage ends.
However, if you refinance the mortgage with the same lender, you cannot deduct
any remaining balance of spread points. Instead, deduct the remaining balance
over the term of the new loan.
A mortgage may end early due to a prepayment, refinancing, foreclosure, or
similar event.
taxmap/pub17/p17-120.htm#en_us_publink1000173280Dan paid $3,000 in points in 1999 that he had to spread out over
the 15-year life of the mortgage. He deducts $200 points per year. Through 2009,
Dan has deducted $2,200 of the points.
Dan prepaid his mortgage in full in 2010. He can deduct the remaining
$800 of points in 2010.
taxmap/pub17/p17-120.htm#en_us_publink1000173281You cannot fully deduct points paid on a mortgage unless the
mortgage fits into one of the categories listed earlier under
Fully deductible interest. See Publication 936 for details.
You can treat amounts you paid during 2010 for qualified mortgage
insurance as home mortgage interest. The insurance must be in connection with
home acquisition debt and the insurance contract must have been issued after
2006.
taxmap/pub17/p17-120.htm#en_us_publink1000173283Qualified mortgage insurance is mortgage insurance provided by
the Department of Veterans Affairs, the Federal Housing Administration, or the
Rural Housing Service, and private mortgage insurance (as defined in section 2
of the Homeowners Protection Act of 1998 as in effect on December 20, 2006).
Mortgage insurance provided by the Department of Veterans Affairs
is commonly known as a funding fee. If provided by the Rural Housing Service, it
is commonly known as a guarantee fee. These fees can be deducted fully in 2010
if the mortgage insurance contract was issued in 2010. Contact the mortgage
insurance issuer to determine the deductible amount if it is not reported in box
4 of Form 1098.
taxmap/pub17/p17-120.htm#en_us_publink1000173284Generally, if you paid premiums for qualified mortgage insurance
that are allocable to periods after the close of the tax year, such premiums are
treated as paid in the period to which they are allocated. You must allocate the
premiums over the shorter of the stated term of the mortgage or 84 months,
beginning with the month the insurance was obtained. No deduction is allowed for
the unamortized balance if the mortgage is satisfied before its term. This
paragraph does not apply to qualified mortgage insurance provided by the
Department of Veterans Affairs or the Rural Housing Service. See the
Example below.
taxmap/pub17/p17-120.htm#en_us_publink1000209421Ryan purchased a home in May of 2009 and financed the home with
a 15-year mortgage. Ryan also prepaid all of the $9,240 in private mortgage
insurance required at the time of closing in May. Since the $9,240 in private
mortgage insurance is allocable to periods after 2009, Ryan must allocate the
$9,240 over the shorter of the life of the mortgage or 84 months. Ryan's
adjusted gross income (AGI) for 2009 is $76,000. Ryan can deduct $880 ($9,240
÷ 84 × 8 months) for qualified mortgage insurance premiums in 2009.
For 2010, Ryan can deduct $1,320 ($9,240 ÷ 84 × 12 months) if his AGI
is $100,000 or less.
In this example, the mortgage insurance premiums are allocated
over 84 months, which is shorter than the life of the mortgage of 15 years (180
months).
taxmap/pub17/p17-120.htm#en_us_publink1000248243If your adjusted gross income on Form 1040, line 38, is more
than $100,000 ($50,000 if your filing status is married filing separately), the
amount of your mortgage insurance premiums that are otherwise deductible is
reduced and may be eliminated. See
Line 13 in the instructions for Schedule A (Form 1040) and complete
the
Qualified Mortgage Insurance Premiums Deduction Worksheet
to figure the amount you can deduct. If your adjusted gross income is more than
$109,000 ($54,500 if married filing separately), you cannot deduct your mortgage
insurance premiums.
taxmap/pub17/p17-120.htm#en_us_publink1000173286
If you paid $600 or more of mortgage interest (including certain points and
mortgage insurance premiums) during the year on any one mortgage, you generally
will receive a Form 1098 or a similar statement from the mortgage holder. You
will receive the statement if you pay interest to a person (including a
financial institution or a cooperative housing corporation) in the course of
that person's trade or business. A governmental unit is a person for purposes of
furnishing the statement.
The statement for each year should be sent to you by January
31 of the following year. A copy of this form will also be sent to the IRS.
The statement will show the total interest you paid during the
year, any mortgage insurance premiums you paid, and if you purchased a main home
during the year, it also will show the deductible points paid during the year,
including seller-paid points. However, it should not show any interest that was
paid for you by a government agency.
As a general rule, Form 1098 will include only points that you can fully deduct
in the year paid. However, certain points not included on Form 1098 also may be
deductible, either in the year paid or over the life of the loan. See
Points, earlier, to determine whether you can deduct points not shown
on Form 1098.
If you prepaid interest in 2010 that accrued in full by January
15, 2011, this prepaid interest may be included in box 1 of Form 1098. However,
you cannot deduct the prepaid amount for January 2011 in 2010. (See
Prepaid interest, earlier.) You will have to figure the interest that accrued
for 2011 and subtract it from the amount in box 1. You will include the interest
for January 2011 with the other interest you pay for 2011. See
How To Report, later.
If you received a refund of mortgage interest you overpaid in
an earlier year, you generally will receive a Form 1098 showing the refund in
box 3. See
Refunds of interest, earlier.
The amount of mortgage insurance premiums you paid during 2010
may be shown in box 4 of Form 1098. See
Mortgage Insurance Premiums, earlier.
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